KEYENCE PART 2 - Outlook for 2023
Konbanwa mina,
Honjitsu wa KEYENCE kabu o bunseki shimasu.
First of all, of course, I wish you to have had a nice Christmas and to have gained a little distance from everyday life. Contrary to other "philosophies" I think it is important to have a balance to the daily stress and therefore I was not very active on Getquin the last days.
Nevertheless, I am very satisfied with the progress of my Getquin - and YouTube channel and thank you at this point for the open cohesion of my community and look cautiously optimistic on the new year 2023. I will continue to tackle stock analysis, market assessments and possibly also political topics. The latter are sometimes like boiling oil, which is why I will continue to stick to community voting. In the future, GIFs will only accentuate and be topic-bound in themselves. In this example: KEYENCE as a Japanese company - hence the Japan GIF. In the future, however, I will not justify my "toned down" GIF choice.
At this point, I hope that more Getquin users will follow my example, since I have recently also noticed exposing GIFs in other posts negatively. Willful aesthetics is one thing - embarrassing shots out of pure bullying desire is another.
Disclaimer: This is not investment advice. It is also not a solicitation to buy/sell financial products. I am merely stating my opinion here. You have your own responsibility towards your investments. No liability.
Now we come to today's topic: KEYENCE - but this time the share of the TOP 5 company from Japan. I recommend to read my first part about KEYENCE before this analysis, otherwise you might not be able to follow it. After all, KEYENCE is a big number of the NIKKEI and not without reason.
Therefore here is the link to part 1:
https://app.getquin.com/activity/dvMDuOjKAc?lang=de&utm_source=sharing
We are now thematically in part 2 of my analysis:
PART 1
- Keyence in facts, figures and data
- Keyence's business areas, products and fundamental situation
PART 2
- The Keyence share - a Japanese giant?
PART 3
- Keyence in Japan
- Japan - a nightmare for ETF investors?
- Opportunities and risks of Keyence's industry
Keyence's share - a Japanese giant?
In order to be able to correctly classify KEYENCE's share and its significance, a structural approach is useful, which can also be applied to other related companies. In the following, I will analyze these parameters and approach from the small-step to the large-step. A typical micro to macro approach that will examine the following metrics:
- P/E RATIO, KBV, KUV
- Sales performance
- Fair value calculation using Graham formulas
- Comparison by chart technique using Nikkei
KEYENCE's current P/E ratio is approximately more than 40 times earnings in 2022. A P/E ratio basically tells us how the market prices a stock relative to its earnings. So we divide the price of the stock by the earnings per share. It's a relatively simple calculation that ignores a lot of things, yet is growing in popularity. In the case of Keyence, we would calculate (cf. (1), (2)):
51340 JPY / 1251 JPY = 41.04x
According to the data from (1), KEYENCE stock is priced by the market at 41x earnings. Using the following equation, this would mean that the current market capitalization would be equal to the company's profit if KEYENCE were to earn 41 times its profit. One arrives at this simple conclusion by simply rearranging the above equation by earnings. But what does this tell us?
Normally, my YouTube subscribers probably now have my standard mantra of the P/E ratio of the S&P 500 in their ears, which is based on a geographically quite different area of the US, yet will now come to most people's minds. The known cross-section of the 500 US companies with the highest market capitalization is at a P/E ratio of 19.90 as of 12/28/2022, so we know that the S&P 500 from the US is valued cheaper at 19.90 than KEYENCE at 41.04 above (see (2), (3)).
What does this comparison bring us?
First of all, not much - we are just comparing the marko level of the USA with a single stock of the Nikkei. In concrete terms, KEYENCE as a Japanese company is logically not part of the S&P 500 but of the Nikkei 225. This may seem trivial according to the motto: "So what?" - however, the Nikkei 225 as a stock market barometer of Japanese companies is currently at only 14.3 times earnings, which is below average in the 3-year cycle. In the last 3 years, the P/E ratio of the Nikkei 225 was 21.2 times earnings. This results in (see (6), (7)):
14.3 /21.2 = 67.45% of the historical 3-year P/E ratio.
Thus, it can be argued that on average Japanese stocks from the Nikkei 225 are historically undervalued by 32.55% vs. the last 3 years. However, this is a dangerous hypothesis, as a look at the period June 2020 to April 2021 of the P/E ratio in the channel of 26.5 times to 31.4 times opens. So we see that the Nikkei is just coming out of a high phase and is now getting closer to its 10-year average of 17.9 times. In January 2013, the Nikkei was pretty much at its market average of those 17.9 times.
So why is the 3-year P/E ratio so high?
Essentially, it's because of the breakout in Japanese equities over the period described. The market capitalization of the Nikkei rose by up to 15% at its peak and is still currently plus 9%. The earnings trend was even consistently negative until February 2022 - the Nikkei 225 companies thus reported lower total earnings on average from the reporting date of January 4, 2020 to February 2022 than on the reporting date in question (see (6), (7)).
If we add the 1-year cycle, we see earnings up 13% but market capitalization down 7%. How does this fit together (cf. ibid.)?
In my opinion, the solution lies in the sector breakdown. Unsurprisingly, the energy and utilities sectors in Japan gained 18.49% and 7.16%, respectively, in one year. The biggest loser was the KEYENCE subsector, although it is relatively irrelevant how KEYENCE is allocated. If we look at Tech, minus 22.12% has been achieved, in the case of Industrial Supplies we are at minus 6.38% and Material Supplies is also negative at minus 8.8%. So it is a richly gloomy picture in terms of sector gains (see (7)).
Going one level deeper and analyzing the Japanese market by sector, we find a very diverse set of sector P/E ratios. While tech from the Nikkei is at 16.4 times, industrial supplies at 9.6 times does not even have a double-digit P/E ratio. In general, according to the current state of the Japanese economy and the world economic situation, valuation growth is expected to affect almost all sectors. Only the energy sector is expected to fall by 8.1% and is thus the only sector in the entire Japanese economy that will fall according to analysts (see ibid.).
Why is this important for KEYENCE?
In order to value a stock, I want to understand its fixed point of the index barometer in terms of valuation, sector breakdown and volatility. We all have an understanding of the S&P 500, the Frech DAX or the MSCI World. In Japan, things are a bit different. It is not for nothing that part 3 will be called "Japan - a nightmare for ETF investors?". Up to this point, the explanations on the Nikkei 225 as well as the general Japanese market, its sector breakdown and its historical development should suffice for now. We now take the following into the stock analysis (cf. ibid.):
- The Nikkei tends to behave relatively stable since 2012 in the channel from the 13-fold to the 32-fold.
- The breakout of the Nikkei has occurred only recently
- The market capitalization has increased by 144% in the last 10 years
- There is a large disparity of the individual sectors of the Japanese market
As we now know, KEYENCE's 41.04 P/E ratio is more than double the Japanese market's 14.03, outperforming the Nikkei at its current valuation even if we choose the Nikkei's 12/31/2020 high of just under 32 (see (7)). Specifically, this calculates a multiple of:
41.04 / 14.03 = approx. 2.93
So we know that we pay 2.93 times the corresponding index standard per KEYENCE share. This tends to indicate a possible overvaluation. If we include the tech sector, the picture does not change, because tech in Japan is currently valued with a P/E ratio of 16.4. It is calculated as follows:
41.04 / 16.4 = approx. 2.502
This means that we have to spend 2.502 times the sector-related index standard for a KEYENCE share. To put it bluntly: Japan's tech sector is valued at just under 39% of KEYENCE's valuation, because:
16.04 / 41.04 = approx. 39.08%.
In general, KEYENCE seems to be relatively highly valued in terms of the P/E ratio - both in relation to the overall Japanese market and the Japanese tech sector. This is at least something to take note of for the time being. But what now?
As many of you know, tech stocks are often highly valued. The sector breakdown of (6) also shows that the tech sector is by no means valued lower than many other sectors in comparison. But what can save KEYENCE's valuation now?
A simple calculation of value investing helps us here. If we convert the average expected growth to the P/E ratio, we get a comparison parameter. This tells us whether, simply put, a P/E ratio matches its growth expectations (see (7),(8)). To do this, we first need to know how much KEYENCE can grow and where the limits are. For this purpose, different parameters can be used - I will use the general market value of KEYENCE. It is important to note that the market value is only a statement on the question "What is the market paying for KEYENCE right now?" and ultimately does not have to say anything about the real value (see (10)). According to (2) and (9), the market value was and is JPY 12,829,669 million in 2021 and is expected to be JPY 12,451,289 million in 2023. This corresponds to a trend growth of the enterprise value of...
STOP! Because we still have to annualize! That is: calculate the average annual growth. Therefore we calculate:
((12451289/12829669)^(1/2))-1 = -1,49%
So we see that KEYENCE will currently lose 1.49% in market value per year until 2023, which tends not to be good for the calculation and shows a decline.
If we use sales instead, we get:
((1073539/551843)^(1/5))-1 = 14.24% growth in sales per year.
In the next step, we calculate the ratio of this growth to the P/E ratio:
FACTOR growth in sales per year / P/E ratio
14,24 / 41,04 = 0,35
So what does this 0.35 tell us? In essence, a value of 0.9 and higher is considered a "discount" for growth. The formula is based on the idea of paying for growth. Meaning: I want to put in a minimum of my money for the maximum growth of the company. With regard to KEYENCE, we have thus received just about one third of the ideal limit. This means that KEYENCE's growth does not seem to be really favorable.
But if the sales increase so strongly, will the P/E ratio eventually fall?
Nobody knows exactly - as a result, analysts calculate various methods for this. If you believe them, KEYENCE's P/E ratio will fall to 28.6 times in 2025 and would thus be cheapest in the period 2020-2025. However, this is a purely speculative thesis and does not have to be correct (see (2), (8)).
Let us additionally calculate with Benjamin Graham's formula what the intrinsic value of the KEYENCE share might be. We already have a lot of information for this. According to (11), the intrinsic value of a share is calculated in a simplified way by means of (cf. (11), (12), (13)):
Intrinsic value = Earnings per share * (8.5+2*annual growth rate)
We obtain for KEYENCE:
Intrinsic value (KEYENCE) = JPY 1,251 * (8.5+2*14.24) = JPY 46,261.98
Thus, according to Graham's simplified method, the stock would be overvalued by:
1-(46.261,98/51.270,00) = 10,83%
10.83% overvaluation is not the same as the multiple from the P/E calculation in percentage terms, but it still indicates a too high share price. If we use the Graham number to calculate what we should pay as a maximum, the following follows:
(22.5*earnings per share * book value per share)^(1/2)
(22.5*745*8962)^(1/2) = 15,882.63 JPY
So we notice that according to earnings per share and its book value, almost a quarter of the existing value has been calculated. This is unsurprising. As we have already noticed from the P/E calculation and the first Graham formula on intrinsic value, KEYENCE tends not to come out so well in the rational justification, as expensive and a lot of revenue hope priced in.
Finally, let's try to calculate what a) KEYENCE could be worth according to market development and b) KEYENCE would be able to achieve according to previous sales increases. For this, I extend the Graham formula by the risk-free interest rate of currently 0.366%. We get for a) the recognized market growth of 9.3% from (6) (cf. (6), (13)):
(1251*(8.5+2*6)*4.4)/0.4 = 282100.5 JPY
For case b) of growth, our future expectations are as follows
(1251*(8.5+2*14.24)*4.4)/0.4 = 508881.78 JPY
Why are these values dangerous? On the one hand, they assume constancy in the development and, on the other hand, they are values that may be reached in the future. However, as we should know by now, nothing can be taken for granted.
What does the whole thing tell me now?
For the time being, I will remain on the sidelines and wait for a more favorable valuation of the KEYENCE share. On the one hand, this is due to my focus on dividend stocks and, on the other hand, the current P/E ratio seems to me to be clearly too high. Growth forecast in sales is there - but whether the rather stagnant market value will follow, seems unclear to me at the moment. Certainly an interesting company - I will keep it in mind.
I hope you enjoyed my little excursion into the world of the Nikkei and maybe you were able to discover something of the stock valuation tools for yourself. My next analysis will be Sony.
Feel free to follow me for more stock market content and support me in my goal for 2023 of 900 subscribers on Getquin and 200 followers on Youtube.
Your Bass-T
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Sources:
(1) https://www.boerse.de/boersenlexikon/Kurs-Gewinn-Verhaeltnis
(2) https://de.marketscreener.com/kurs/aktie/KEYENCE-CORPORATION-6492212/fundamentals/
(3) https://www.boerse.de/kgvs/KGV-SundP-500
(5) https://boerse-muenchen.de/suedseiten/9759/Der-Nikkei-koennte-deutlich-ueber-30.000-steigen
(6) https://simplywall.st/markets/jp
(7) https://siblisresearch.com/data/japan-nikkei-pe-cape/
(8) https://www.valuejump.de/den-inneren-wert-einer-aktie-berechnen/
(10) https://investment-tussi.de/unternehmenswert-%E2%89%A0-marktwert/
(11) https://www.value-akademie.com/benjamin-graham-value-investing/
(13) https://www.fairvalue-calculator.com/de/rechner/graham-zahl-rechner/
